Financing of small and medium enterprises (SMES): facilitation through rotating credit and savings associations (ROSCAs) in Lahore

• Main Author: Ullah, Mir Salim
• Format: Thesis
• Language: English; English
• Published: 2017
• Subjects: HG Finance
• Online Access: https://etd.uum.edu.my/7279/1/s94987_01.pdf; https://etd.uum.edu.my/7279/2/s94987_02.pdf; https://etd.uum.edu.my/7279/
• Institution: Universiti Utara Malaysia

SMEs are the backbone of Pakistan’s economy but they have limited access to the formal sources of finance. According to the SME Development Authority (SMEDA) of Pakistan, 90% of start-ups exit within four years. The current research was carried out to discover the extent of the contribution of Rotating Credit and Savings Associations (ROSCAs) to the SME, explore their weaknesses and to develop measures to transform them into a significant source of SME finance. The study was conducted in the city of Lahore. Purposive sampling technique was adopted to collect the data from 433 entrepreneurs and eight informants. Nearly 90% of the respondents resort to ROSCAs-financing. The ROSCAs system finance the 386 sampled SMEs to the tune of Rs468 million every cycle. The average contribution per SME is Rs1.08 million per cycle. Only 9.8% of the sampled population had obtained formal loans during the last five years. The current study does not support the findings of SMEDA which reported that 80 to 90% of the start-up's exit within the first four years. The majority of respondents expressed fear of failure of ROSCAs is due to fraud or mismanagement and felt that management of ROSCAs by banks can assist in preventing mismanagement or fraud. Laws and procedures for managing cases of dishonoured checks are very weak. Since ROSCAs are extra-legal and un-registered, ROSCAs-related disputes have to be settled out of courts. Furthermore, the concept of Shirkah al-Wujuh was found to be widely practised in the form of ROSCAs for the interest-free (Islamic) financing of SMEs. The recommendations of the current study can be helpful in fortifying the existing ROSCAs system as well as promoting easy and secure access to finance. Moreover, banks can use these findings to position themselves as guarantor and play effective role in the entrepreneur- driven SME finance market.